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Update on Service Tax on Construction Services

15 Feb 2012

The tax authority has sought to clarify the service tax position on some of the arrangements between the builder / developer, landlord, investors, contractors and end buyers in Residential, Commercial or Industrial projects. Taxand India discusses how this could affect companies in the construction industry.

The following arrangements seek to clarify the service tax implications under the taxable category of "Commercial or Industrial Construction" services and "Construction of Complex" services:

  • Tripartite Business Model covering (i) landowner; (ii) builder or developer; and (iii) contractor who undertakes construction
  • Redevelopment including slum rehabilitation projects
  • Investment Model
  • Conversion Model
  • Build Operate Transfer "BOT" Projects
  • Joint Development Agreement Model

Taxand India considers the construction tax clarifications in greater detail

Taxand's Take

Clarifications are provided for certain important aspects of the levy of service tax on builders / developers. Although, while the intention seems to be clear, to tax most of the transactions covered under the various models, the applicability of these clarifications to the taxable category of "works contract" services, under which the builders / developers and contractors are more often than not registered, remains debatable.

Having said that, the fact remains that the clarification seeks to address certain complex transactions. Although it is not practically possible to cover all kinds of contracting structures / arrangements in the real estate and infrastructure space, the clarification most surely will increase awareness and set in motion the debate on service tax applicability on such complex transactions. At the end, the service tax implications on the various models, should largely depend on the intention of the parties and the specific terms of the contract / agreements.

Your Taxand contacts for further queries are:
Mahesh Jaising
T. +91 124 339 5010

Prashanth Bhat

Taxand's Take Author